Euro set for biggest weekly loss in 2017 as ECB strikes dovish stance

The euro fell on Friday and was on track for its biggest weekly loss of the year, weakened by falling core bond yields as investors added to bets that interest rates in the U.S. would rise faster than in Europe.

Carry trades were back in fashion as strong U.S. corporate earnings and a growing view that more rate hikes in the U.S. pushed the dollar to parity with the Swiss franc for the first time in five months.

Investors played the diverging monetary policy outlook between the U.S. and Europe, where some market watchers were taken by surprise by the degree of dovishness in comments by European Central Bank policymakers at a policy meeting on Thursday.

“(President Mario) Draghi’s discussion of the ECB’s reinvestment strategy has hammered home the message that the “flow component” of the recalibrated QE (asset purchase) programme will remain sizeable,” said Valentin Marinov, head of G10 FX research at Credit Agricole in London.

“Moreover, the President’s comments on safeguarding QE’s longevity caught some market participants by surprise and this could leave the euro vulnerable in the short term.”

The euro fell by 0.3 percent to $1.1611, its lowest since July. 20 and is on track for its biggest weekly loss since the fourth quarter of 2016.

Benchmark 10-year German bond yields were at 0.41 percent, in sight of a 1-1/2 month low of 0.36 percent hit last week. <GVD/EUR>

The dollar index, which tracks it against a basket of six major rivals, added 0.4 percent to 94.96, trading at three-month highs and on track for a weekly gain of 1.1 percent.

“From a broader point of view, we are somewhat surprised that the ECB did not take the opportunity to mark a sharper break with its current policy settings,” Rabobank strategists said in a note.

Across the Atlantic, investor attention remains on candidates to head the U.S. Federal Reserve when Janet Yellen’s term expires in February.

U.S. President Donald Trump’s search for the next central bank chair has come down to Fed Governor Jerome Powell and Stanford University economist John Taylor, news and analysis website Politico on Thursday cited one source as saying.

A White House official told Reuters that no final decision has been made.

Trump is expected to announce his candidate before a trip to Asia in early November.

Markets will be looking for further clues in third quarter U.S. GDP data due shortly, with analysts expecting a print of 2.5 percent growth compared to 3.1 percent in the previous quarter.